ISLAMABAD: Fitch Ratings, one of the world’s top three agencies, on Monday affirmed Pakistan’s long-term foreign currency issuer default rating (IDR) at ‘B-’ with a “stable outlook”.
“Pakistan’s rating affirmation reflects progress on fiscal consolidation and macro stability measures, broadly in line with its International Monetary Fund (IMF) programme and supporting its funding capacity,” the US-based rating agency said.
“Foreign exchange buffers rebuilt over the past year provide a cushion against the economic impact of the war in the Middle East, while Pakistan’s role as a ceasefire broker may provide tangible benefits and partly offset external pressures,” it said.
However, it highlighted that the country’s high exposure to the global energy price shock remained a key risk, particularly if it led to a sharp drop in foreign exchange reserves.
Talking about key rating drivers, Fitch said the authorities reached a staff-level agreement with the IMF on its loan programmes in March, unlocking a combined $1.2 billion.
“The programme will continue to provide a key policy anchor, particularly for the fiscal framework, and will help mobilise additional multilateral and bilateral support,” it said.
However, it pointed out that Pakistan’s vulnerability to energy shocks.
“Pakistan sources up to 90 per cent of oil from the Gulf and has limited storage capacity, creating high exposure to the Middle East conflict and constricted energy supply via the Strait of Hormuz,” it said, adding the fuel subsidies since early March had been funded by reallocating expenditure from other areas of the budget, while costs had been reduced by large pump-price hikes and the switch to a more targeted support scheme from April.
“We expect the overall impact on the fiscal deficit to be contained, as the government is likely to cut other spending,” the rating agency said.
On the inflation side, the rating agency said higher global energy prices would raise inflation in the coming months, especially with the switch to more targeted subsidy support and base effects.
“We expect inflation to average 7.9pc in FY26 (ending June 30), above the FY25 level but well below the 23.4pc in FY24,” it said.
The State Bank of Pakistan (SBP) had cut the policy rate to 10.5pc by the end of 2025, from 22pc at the end of May 2024, and market interest rates fell in tandem. However, the term interbank rate had risen to about 100bp above the policy rate by early April, on inflation concerns tied to the tight energy supply.
“The shock will detract from gross domestic product (GDP) growth, but we still expect growth of 3.1pc in FY26, up slightly from 3pc in FY25, due to improved confidence from lower borrowing costs,” it said.
It anticipated external debt amortisations to rise to $12.8bn (2.9pc of GDP) in FY26, from almost $8bn in FY25. A $3.5 billion deposit was repaid to the United Arab Emirates (UAE) in April, the agency said, even though repayments have yet to take place. It said the amortisation projections exclude another $9.2bn in bilateral deposits and loans expected to be rolled over.
“We expect debt to be financed mainly by IMF and other multilateral and bilateral inflows, followed by commercial financing. Pakistan plans to issue a panda bond this fiscal year,” it said.
Fitch expected the primary surplus to narrow to 2.1pc of GDP in FY26, 0.3ppc below the official target.
“This will follow a rise in non-interest current expenditures and limits to sustained gains in tax revenue/GDP, due to capacity constraints and difficulties executing federal tax reforms at the provincial level,” it said.
“We expect the primary surplus to shrink further in FY27 as extraordinarily high SBP dividends are unlikely to continue in our view, while lower interest payments as a share of GDP will help keep fiscal deficits stable at about 5.3pc of GDP,” it said.
“A primary surplus and lower domestic borrowing costs should lower general government debt/GDP to 68.9pc in FY26 from 70.7pc in FY25, still well above the ‘B’ median of 51.3pc of GDP in 2026. The ratio is expected to decline only gradually over the medium term as the primary surplus narrows. Pakistan’s general government interest/revenue ratio should remain very high at 46.5pc,” the rating agency said.
The current account was expected to return to a small deficit of 1.1pc in FY26 from a rare surplus of 0.5pc in FY25.
“Pakistan’s foreign exchange policy continues to exhibit rigidities despite a push towards currency liberalisation in 2023, and the rupee has appreciated by 30pc in real effective terms from its early 2023 trough, likely contributing to large merchandise trade deficits,” the agency said, adding that hydrocarbons typically comprised between a quarter and a third of goods imports.
It also noted that large and sustained net foreign exchange purchases by the SBP on the interbank market and a gold price rally led to foreign reserves of just under $28.4bn in February 2026, while non-gold reserves rose by about $5.1bn year-on-year to $17.5bn.
“We expect the current account deficit, and repayment of a $1.3bn Eurobond and the UAE deposits in April to bring foreign exchange reserves down to $21.3 billion by the end of FY26. This will cover 2.9 months of current external payments, from $22.6 billion at the end of FY25,” it said.
The agency said that net foreign exchange reserves remained negative, reflecting reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP.
It also noted that tensions between Pakistan and Afghanistan had escalated since February 2026.
“Nevertheless, the potential impact on trade and the wider economy is likely to be limited. Our baseline does not include further escalation, given Pakistan’s financing constraints, but the conflict presents a considerable risk to its commitment to fiscal consolidation,” the agency said.
